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Political uncertainty and Brexit challenging renewables growth

2017 has seen a number of “firsts” when it comes to the contribution from renewable energy to total UK CO2 emissions, UK energy output and policy developments. In addition, the various elements: renewable electricity, heat and transport that contribute to the UK’s objective of 15% renewable energy by 2020 (Renewable Energy Directive (RED), when combined, would likely give a value in line with, if not exceeding, the trajectory for the UK to remain on track.

Turning to look at how we are performing against the UK’s 2020 targets, last year’s REview reported the averaged target for across 2015/2016 (the third interim target) of 7.47% for the UK would not only be on track but likely to be exceeded and be as high as 8.3%. DUKES1 published later in the year, confirmed that the value was actually 8.5% - beating expectations. The main reason for this was the exceptional performance from renewable power, delivering at high levels across the two years. It was clear that power essentially masked the disappointing contributions from renewable heat and transport.

The fourth Interim target measuring the average across 2017/2018 should be 10.2%, a considerable increase, and in this year’s report we can only describe the performance against the first part of this date range. The value for 2017 RED is anticipated to be slightly higher than the 2016 figure, however, as the data for heat has yet to be finalised for 2017 and RED “normalised” data for heat and transport have not been calculated – the figure that will be reported to Brussels (via EUROSTAT) will not be available until quarter three this year.

The generating capacity and output values quoted in this report describe 2017 actuals for electricity and 2016 for heat and transport, as quoted in the DUKES publication by BEIS.

Looking at renewable electricity in more detail, the renewable share of electricity generation was a record 29.4% in 2017, an increase of 4.9% on the 24.5 % share in 2016. This reflects the higher renewable generation (98.9 TWh, a record high, and an increase of 18.8% on 2016) and slightly lower overall electricity generation in 2017. Renewable electricity capacity was 40.5 GW at the end of 2017, a 13.3 % increase (4.8 GW) on a year earlier, largely due to increased wind (both onshore and offshore) and solar PV capacity. This increased capacity, plus the increased wind speeds compared to the year before, gave rise to the record generation output. Onshore wind had the highest share of capacity at 32 % (12.9 GW), followed by solar photovoltaics (PV) at 32 % (12.8 GW), offshore wind (17 %), bioenergy (15 %) and hydro (4.6 %).

It is important to note that, on the 2009 EU Renewable Energy Directive (RED) basis, normalised renewable generation (accounting for variable weather) in 2017 was also a record with 28.1 % of gross electricity consumption, an increase of 3.5 percentage points on 2016’s share. Renewable electricity generation is almost at the 2020 target levels. The RED measure uses normalised wind and hydro generation, to account for variable generation due to weather conditions. Under this measure, normalised net wind and hydro generation were lowered (due to higher than average load factors in 2017), a reversal of 2016.

Solar PV capacity increased by 0.9 GW during 2017, compared to a 2.4 GW increase during 2016. The majority of growth came from sites accredited under the Renewables Obligation (RO), mainly in 2017 Q1, ahead of the final closure of the RO. The exception being grace period qualifying RO projects, as well as an increase in small scale Feedin Tariff sites, and a second solar farm under Contracts for Difference (CfD).

It is important to note that for 2017, 32% of renewable power generation was from bioenergy, 29% from onshore wind, 21% from offshore wind, 12% from solar PV, and 6.0% from hydro because of load factors of the different technologies. Without bioenergy sources of renewable power, the amazing performance from renewable power would be almost one-third lower and the UK would be unable to remain on track to deliver its low carbon targets.

Renewable heat generation grew in 2016

The UK received 6.2% of its heat from renewable sources, against a goal of achieving 12% in 2020. It increased by 13% in 2016 to 3,408 ktoe. Solid biomass equals 86%, anaerobic digestion 4.5%, with energy from waste, landfill gas, and sewage gas makes up 3.3%. Solar thermal makes up 1.3%. Renewable energy generation from heat pumps now sits at 4.6% in 2016, due to an increase in capacity. Around 15.1% of renewable heat was supported by the Renewable Heat Incentive (RHI) or Renewable Heat Premium Payment (RHPP). The RHI-supported heat has furthermore grown from 589 ktoe (6,852GWh) in 2016 to 737 ktoe, (8569 GWh) in 2017. Most of this increase can be accounted for by biomethane injected into the gas network, and demand for biomass driven by the increase in medium biomass boilers in the non-domestic sector.

2018 saw the final set of reforms to the Renewable Heat Incentive scheme come into force. This now sets the scheme on a sound footing through to 2021. The amendments include the ability to guarantee a tariff ahead of installation, which is a welcome addition to the scheme, particularly for the biomethane and large biomass sectors. However, the support for biomass has been lowered, which may stifle this sector.

The non-domestic RHI scheme was launched in 2011, and there are now more than 19,500 installations. The scheme produces enough renewable heat for more than 640,000 homes. The domestic RHI was launched in 2014, and more than 67,000 homes are now using it to make the transition to low-carbon heating. Before the RHI started, only 1% of our heat came from renewable energy sources.

The UK renewable transport fuels

At the time of going to press official figures for the RED are only available for 2016. They show a market dominated by liquid biofuels, with 49% of supplies coming from bioethanol, 47% biodiesel and 4% biomethanol.

A look at liquid biofuels (as reported in Energy Trends March 2018) shows that in 2017, 1,460 million litres of liquid biofuels were consumed in transport, a decrease of 0.5 per cent on 2016. Bioethanol consumption increased, by 0.6%, from 759 million litres to 764 million litres. Biodiesel consumption fell by 1.7%, from 708 million litres in 2015 to 696 million litres in 2017. Bioethanol contributed to 52% of biofuel consumption, compared with 48% from biodiesel. This split is almost equivalent to that recorded in 2016. In volume terms, bioethanol accounted for 4.5% of motor spirit, and biodiesel 2.3% of total diesel; the combined contribution to total road fuels was 3.1%, only a 0.2% increase on 2016. The contribution has remained low and is not on track to deliver the 2020 RED target of 10% for UK land transport.

The trend towards using a higher percentage of waste feedstock continued with 2017 increased to 66.3%, up from 59% in the previous year. Almost a quarter of the UK’s renewable fuels feedstocks are domestically sourced - 17% of bioethanol comes from UK feed wheat and 19% of biodiesel comes from UK sourced waste. Waste-based biofuels earn double rewards under the UK’s Renewable Transport Fuel Obligation (RTFO) which means paradoxically that a lower volume of actual biofuel has been supplied at 2.9%, giving an overall 4.94% in accounting terms for 2015/16. The case for biofuels remains very clear as the greenhouse gas savings from biofuels has now reached 74% compared to fossil fuel sources.

In 2017 the industry finally saw the long awaited Renewable Transport Fuel Obligation review move forward and the amendments came into force in mid-April 2018, marking the end of stagnation for this sector. It also introduces a new incentive for the production of novel fuels from wastes, as well as one for hydrogen and for renewable fuels from non-biological sources (e.g. CO2). Biomethane use for heavy goods vehicles is slowly growing in importance. This attempt to finally get into gear has been jump started following the shocking recognition that transport now accounts for 27% of the UK’s Greenhouse Gas emissions (GHGs), overtaking power generation as the largest emitter in 2017 as reported by the Committee on Climate Change (CCC).

The contribution from switching vehicles to electric and other renewable sources such as biomethane and hydrogen derived from renewable sources is at the start of its journey so has had little impact on meeting renewable transport targets in 2017. Yet with EV car sales growth rates at 26% and around 2% of the UK’s vehicle fleet now with a battery element, (Department for Transport data reported that in 2017 over 53,000 new Ultra-Low Emissions Vehicles (ULEVs) were registered in the UK), 2017 was hailed as the year that kick-started the EV charge. The CCC have also released key reports calculating how many EVs would need to be on the road by 2020 to contribute significantly to a reduction in emissions and this is a “not insignificant” 400,000 vehicles.

General comments about deployment and policy

The UK’s required growth trajectory to meet the 2020 ambition over the next three years remains very steep – and continues to be one of the highest of any EU member state. Certain groups have clearly argued that the RED target is of less relevance today following the EU referendum and that the UK Climate Change Act and its drive to reduce greenhouse gas emissions, has taken prominence over meeting such targets. However, it is clear that much of the ability to deliver the 3rd and future Carbon Budgets relies on policies put in place to date, including the assumptions that the RED targets will be met, and more action delivered.

Looking even further forward through to 2030, the Clean Growth Strategy itself admits that when calculating all the measures the government have put in place to date, that there are significant gaps to understanding how the 4th and 5th budgets can be achieved. Whilst there is clear commitment for the UK to not only embrace but lead the Smart energy revolution and progressing low carbon transport by supporting EV’s (as referenced in the Industrial Strategy and the smart flexible systems plan), it may be too little too late in delivering on not only the binding agreements with its EU colleagues but to meet our own UK environmental legislation. A clear example for this lack of confidence is the Government’s difficulty in pulling together a cohesive heat strategy that not only addresses renewable heat source alternatives but also tackling the legacy of UK’s poorly insulated homes and improving energy efficiency in Industry. Even plans for new builds have not embraced the dire necessity to wean the built environment off gas. The earliest date for any semblance of a heat plan for the on-gas-grid area is not expected until into the 2020s. The Government has instead decided to decarbonise heat off the gas grid first.

More will be needed in addition to making statements that “all UK coal fired power stations will close by 2025”, particularly when there is no clear strategy of how the UK economy will truly consign fossil fuel gas to be a transition fuel. In addition, there is a lack of joined up thinking on the benefits of truly embracing a circular economy, such as focusing on using the waste we will still unfortunately produce as a valued resource, rather than send it to landfill.

Maybe there is light at the end of the UK’s climate change tunnel as there is now a growing recognition and concern that the “on track” renewable energy and CO2 figures mask stark the under performance of the transport sector in meeting its RED target.

Jobs in renewables and market value continue to grow albeit at a slower pace than hoped and still unevenly across the sectors. A major concern is the continued contraction of jobs in the solar PV industry.

From data provided by Innovas, just over 127,000 (Table 1) people were employed across the UK renewable energy value chain in 2016/17, a “like-for-like” increase of only 0.9% on the previous year.

If there was one highlight to pick from the analysis of the data, it is that the change in policy on Feed-in Tariffs alongside early closure of the Renewables Obligation has seen a decrease in employment of the solar sector of 20.3%, 2900 jobs lost in one year. These are mainly in “installation” related roles and a further reduction are likely to be seen in next year’s data.

The highest percentage levels of employment growth are seen in wave and tidal (albeit from a very low base), onshore wind energy (6.6 %), biomass heat (4.9%), energy from waste (5.1%) and offshore wind (4.9%). The employment growth rate is now below growth in market value.

The number of companies working in the sector has decreased by 2.3%, largely as a result of the contraction of the solar PV sector. Solar PV has also fallen from its top position of having the largest number of companies. This has been overtaken by those linked with off-shore wind.

The industry’s market value has increased over that time by only 2.1% - the lowest rate the REA has reported to date – to £17.9 billion. The analysis forecasts the potential to increase to ?22 billion by 2019/20, a 22.9% increase. If employment numbers increase at a similar rate to the possible increase in market value over that time, this would imply an additional 30,000 people could be employed.

However, a more cautious forecast reflecting decreased confidence of the previous year (following the abrupt and unexpected changes in UK support and policy in late 2015 and early 2016 now bearing fruit) would suggest a potential increase of about 14,000. Even at this lower number, this is still bringing new skills, capabilities and opportunities to the UK employment market to rival other energy technologies. These jobs are also distributed across all regions of the UK. If there was ever a clear demonstration of the impact of abrupt policy changes then employment in the renewable energy industry illustrates this.

Clean technology developments around energy storage and electric vehicles have seen a slight increase in jobs these technologies, although continued constraints on deployment has seen a slight reduction in energy storage roles.

Investment in renewables grew albeit at a lower rate and significantly more is needed.

According to Bloomberg New Energy Finance investment fell from 23.4$bn in 2016, to 10.3$bn in 2017. However, there is room for optimism with 2018 seeing unsubsidised solar projects start to become investable without subsidy, policy changes finally being laid in Parliament giving stability for the Renewable Heat Incentive (RHI) through to 2021 and regulations to increase the amount of renewable fuel blended into the transport fuel mix.

Alongside opportunities for investing in renewables, the wider clean energy sector is also providing attractive propositions for investors. Falling battery costs mean the economics of battery storage continue to improve, innovative business models for supply and demand side response continue to evolve and the rapid growth in electric vehicles mean significant investment in the infrastructure for charging will be required.

So, looking forward there are very good reasons for optimism in the finance sector; albeit to unlock its full potential Government still needs to be clear on the long-term ambitions for the sector especially up to 2030, a sentiment shared by respondents to a short survey the REA conducted.

Looking forward

As was the case in the previous two editions of REview we have not provided a growth forecast for any of the technologies covered in the publication.

With Brexit discussions still ongoing, our future relationship with the European energy market to be confirmed and the UK’s renewable energy ambition to 2030 unclear, we conclude that projecting forward at this time would be largely guesswork. Within Europe it is clear renewable energy deployment is forging ahead with clarity just around the corner on a renewable energy target for 2030 which we expected to be above 30% and is now agreed at 32%. Further afield we have seen countries such as China and India continue to deliver 100’s of GW of renewable energy, in part to deliver on their commitment as signatories of Climate Change Agreements, but also because it makes sense to embrace decentralised energy solutions to avoid being encumbered by old fashioned energy infrastructure and thus avoid some of the historic challenges they bring.

Large international corporates with a socially responsible vision; continue to take a lead in reducing their carbon footprint by generating or buying in renewable energy. They can see the business opportunities that renewable energy gives them and with many operating internationally do not wait for Governments to act.

With all that is happening it is still possible to say that it is not all bad news for the renewable energy and clean tech sector here in the UK. There are still significant concerns about the viability to deliver a nuclear solution, both in cost, timescale terms and public opinion; in contrast renewables remain the publics’ generator of choice and can be deployed at scale today. There remains a lack of investors willing to come forward to fund new large gas generating plant.

This is providing opportunities for renewable energy to be deployed at scale. Particularly for technologies such as solar, wind, and biomass with their costs continuing to fall even here in the UK. It is extremely heartening to see the first solar projects being deployed through investor and consumer choice rather than, or even despite, Government policy. However, the closure of the Feedin Tariff in 2019 does cast a shadow over future deployment in the residential market where continued support is needed until costs fall sufficiently for it to be financially attractive subsidy free.

Historically, neither the Government plans made in 2009 to deliver the UK’s RED ambitions, nor the Climate Change Committee in the 3rd Carbon Budget had any expectations of the dramatic reduction of costs of solar nor wind, to which can also be added the extraordinary development in complimentary technologies such as energy storage, spurred on by lower battery costs. Indeed, as mentioned in this report, the costs for these technologies are expected to fall further over the coming years. On cost grounds alone, these technologies are serious challengers to the incumbent technologies as well as new gas and nuclear plant. Energy storage solutions also address solar and winds variability of generation seeing an energy storage system deployed alongside a solar or wind installation will become the norm.

Electric vehicles are also becoming serious contenders in the transformation of the passenger car and light commercial vehicle markets to lower carbon alternatives. They not only address carbon emissions but also the challenges of air quality blighting many of our towns and cities. Electrification only addresses a part of the issue and will take time. That is why a greater use of biofuels and renewable gas in the transport sector during the transition in the passenger car and light commercial vehicle sectors is essential as well as being the long-term solution in the heavy vehicle, aviation and much of the marine sectors.

Across the world smarter technologies both in hardware and software terms are putting the control of energy in homes and businesses in the hands of the consumer. It really is a case of when, not if, decentralised energy becomes the new norm. This seismic shift in energy will provide the UK with opportunities to play a major role in supplying the kit and expertise needed to deliver the transformation; we just need Government to develop the framework to allow this opportunity to be realised.

Over the coming months we hope for clarity around Brexit, the UK’s position in relation to the EU energy market, what comes after the closure of the Feed-in-Tariff and Government’s intentions regarding a 2030 renewable energy target. The REA will continue to monitor the situation carefully and will provide updates over the course of the year. It is clear to us that the next two-three years will be some of the most important years for the future of the renewable energy and clean technology economy here in the UK and internationally.

This blog is an excerpt from the influential Renewable Energy View 2018 (REview 2018) report released in June; the full study reflecting the performance of the renewable energy sector over the past year can be read here.

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